Hotels were favored by investments from international shareholders during the eighties, but a recession and the fall of real estate drove away private investors. Instead, the nineties witnessed the acquisition of many hotel firms by real estate investment firms (REITs). In part, the trend of these investor firms was driven by the investment needs of private or official pension funds, which needed to make different investments to diversify their portfolios of public securities.
by Glenn Withiam
After the recession of 2002 to 2003, suddenly the market favored private shares again and a flood of publicly owned hotel companies were "privatized" in leveraged purchases. Such notable companies as Prime Hospitality and Hilton were acquired by private investment firms, especially Blackstone. A new research report by Jack Corgel looks at these transactions to determine why private equity had so much stake in the hospitality industry during that period.
The report"Private Equity Investment in Public Hotel Companies: Recent Past, Long-term Future" is offered at no cost on the Cornell Hotel Industry Research Center (chr.cornell.edu) website.
The blow of the financial crisis
Corgel, a Robert Baker Professor of Real Estate at Cornell's School of Hotel Management, notes that the door to private equity transactions closed as quickly as it opened when the financial crisis hit the global market between 2007 and 2008. Examining transactions carried out in the period 2003-2007, he found that private capital enjoyed several advantages over public companies in the acquisition of hotel firms.
For starters, Corgel found that private investment firms have had more consistent access to capital than public firms in recent years. In short, speculative capital has flowed into root property of all kinds. It also points out that assets owned by public capital tend to be devalued by the market. One reason for this notorious devaluation is the expectation that exchange-traded firms should be conservative in handling their debt, while private companies have no such limitations. That gives private interests a distinct financial advantage in the current low-interest rate environment, as they can make greater use of debt financing than publicly owned real estate investment funds (REITs). Beyond the financial advantages, private firms do not face the regulatory requirements that shelter public companies.
Private individuals benefit
In analyzing specific transactions, Corgel found that private funds made considerable profits from many of their hotel investments. Corgel points to the purchase of Prime Hospitality by Blackstone. The company managed to modify the AmeriSuites chain and sell it to Hyatt, in a transaction that would have been difficult for two firms with shares on the stock exchange.
Although the flow of funding has been interrupted by the current credit situation, Corgel sees reasons why the hotel industry will continue to privatise when normal market conditions are restored. On the one hand, most hotels are already in the hands of private shareholders. The researcher sees nothing wrong with hotel chains being in the hands of public companies, but his study indicates that private property could be better suited to the industry, given that private operators have more scope for action and do not have to answer to regulators or shareholders.
